Perth

The new and the old ‘normal’ for the WA commercial property market: WA emerged from the GFC in a strong position

2013-03-06T06:00:00Z

For investors, the Perth CBD office market is increasingly competitive with Sydney and Melbourne

PERTH, 6 MARCH 2013 – Commercial real estate has progressed since the onset of the Global Financial Crisis in late-2007 - but will it we get back to 'normal' market conditions; or has the real estate market permanently changed?

An upcoming White Paper to be released by Jones Lang LaSalle identifies a range of changes – some of them permanent or structural, others short-term or cyclical, which have been initiated by the Global Financial Crisis. The Paper will outline what these changes mean for real estate owners, investors and tenants.

At a research event in Perth, Australasian Head of Research and Consulting at Jones Lang LaSalle, Dr David Rees outlined the major trends in 2013 for the commercial real estate market in WA.

Dr Rees said, "Across many metrics – vacancy, yields, rents and capital values – commercial real estate markets have returned to something close to 'normal' market conditions. But in other respects, such as cross-border capital flows and the gap between property and bond yields, real estate markets appear to have permanently shifted."

A notable feature of commercial real estate in recent years has been the surge of offshore investment into the domestic market. 2012 saw a strong rebound in property transactions. Jones Lang LaSalle recorded AUD 17.6 billion of transactions nationally (office, industrial and retail) and AUD 1.8 billion in WA. Notably, in 2012 offshore investors accounted for 29% of all transactions (> AUD 5 million) across the office, retail and industrial sectors nationally and 18.1% in WA.

Jones Lang LaSalle research notes that a range of global investors and sovereign wealth funds have signalled that they will be lifting their portfolio exposure to the real estate sector over the next few years. This may signal a permanent shift towards real estate globally and in Australia.

Jones Lang LaSalle's WA Managing Director, John Williams said, "Over the long term we expect to see Perth re-rated relative to Sydney and Melbourne. Perth will become increasingly competitive with Sydney and Melbourne as its relative size and tenant diversity increases. Already Perth and Brisbane together comprise around 25% of Australia's office stock by value, making it more difficult for portfolio investors to ignore."

Mr Williams noted that despite the headwinds of the past few years, the Perth market had shown strong growth.

"We have seen CBD occupancy rise by 225,000 square metres or 17% since the onset of the GFC and capital values in the industrial market are 27% up on the trough in 2009. As the pace of investment in the resources sector moderates we are seeing a rising level of interest in Perth as a finance and services centre," said Mr Williams.

While demand for premium grade assets by offshore and domestic investors is rising, construction in Australia remains near a cyclical low, emphasising the growing scarcity of investment grade stock.

Dr Rees said, "Yield spreads have been widening and we foresee that this process will continue as offshore and domestic investors compete for the limited stock of premium grade assets."

High-low yield spread Perth CBD prime office market

Dr Rees said, "Low interest rates will have an impact on refurbishment and building life-cycles, driving the next cycle of construction. Low interest rates reduce the hurdle rates for investment and increase the payback period. Office markets with an ageing stock of assets are candidates for refurbishment and a new generation of assets that meets efficiency and modern sustainability criteria," said Dr Rees.

Jones Lang LaSalle estimates that 42% of the Perth CBD office stock is more than 30 years old – the oldest profile of any CBD market except Sydney.